Today's health care industry is not a still-life painting; it's a constantly shifting kaleidoscope. Everyone from brokers to employers, providers to carriers are scrambling to track the rapid changes and reassess their roles in a fluid environment.

Warren Buffett, chairman of Berkshire Hathaway and a newcomer to the industry, memorably sized up the situation. “The ballooning costs of health care act as a hungry tapeworm on the American economy,” he famously said in a recent statement. “Our group does not come to this problem with answers. But we also do not accept it as inevitable.”

One element that does seem inevitable, however, is price escalation. The annual premium for a family covered by employer-provided insurance is nearly $19,000, according to a 2017 survey by the Kaiser Family Foundation and Health Research & Educational Trust. With no slowdown in sight, brokers, carriers and entrepreneurs are repositioning themselves for an uncertain future.

Brokers building through consolidation

Large agencies are increasingly shopping for attractive acquisition partners that will contribute to profits, although overall merger and acquisition activity has remained steady during the past five years.

“There continues to be more buyers than sellers, which has created a good market for agency owners who are preparing for retirement and are looking to sell their agency,” says Jim King, owner and wealth manager with Balasa Dinverno Foltz LLC in Chicago. “The large agencies continue to be in acquisition mode.”

King cites Acrisure, HUB International and BroadStreet Partners as the three most-active acquiring agencies.

“I would say the top-performing agencies, regardless of size, are all looking to grow,” he says. “There continues to be a shortage of high-level producers who can sell. Absent of finding top-performing producers, agencies have to find other ways to grow, and acquiring other agencies does provide for additional growth. Additionally, by acquiring the right agencies, growing organizations can add talented individuals to their team.”

Private equity firms are fueling this economic engine.

“The top three acquirers are or have been backed by private-equity investments,” King says. “The consistent cash flows that agencies provide, coupled with the low-interest-rate environment and favorable tax treatment, have created a nice return on investment for private-equity investors.”

Agency valuations are at record highs, he adds, which may tempt some owners to consider selling. But King cautions against making a rash decision they later may regret. “Agency owners need to ask themselves why they would consider selling their agency,” he says. “Owners who get excited about the value of their agency and cash out purely on price are often left frustrated and disappointed.”

Consolidation can be a double-edged sword for buyers and sellers alike.

“The agencies that have been most successful with transitioning their small agency into large agencies have been able to better leverage technology, improve and grow their service offerings, and provide more talent and specialized expertise to their clients,” King says. “Consolidation is both good and bad for agencies. Consolidation done well can create many new opportunities for growth in terms of services and offerings. It can also allow for cost reduction, because if done well, an organization can do more while eliminating overhead.

“The biggest challenge is making sure the company stays focused on what made them successful.”

Power players entering market

Today's most-trusted brands have done just that—stayed focused on what made them successful—at least until recently. But some surprising names have recently entered the health care industry, with the leadership and financial clout to bring serious disruption:

• Berkshire Hathaway is joining with Amazon and JP Morgan Chase in a high-profile venture. • Amazon recently spent $1 billion to acquire startup online pharmacy PillPack. • CVS bought Aetna for $69 billion. • Cigna invested $67 billion to purchase Express Scripts. • Walmart and Humana continue to explore ways to expand their partnership.

Chris Yarn, managing partner of WalkOnClinic in Winter Park, Florida, keeps a close eye not only on what is happening, but on what it could mean for brokers.

“What about Walmart buying Humana?” he asks. “Or Cigna buying Express Scripts? What do you think is going on? These guys are not idiots. They see what is happening with Blockbuster, with Toys “R” Us and with brick-and-mortar retailers.

“If you are Cigna and Amazon is entering the pharmaceuticals space, it probably makes sense to buy Express Scripts before they do. It may make sense for executives at CVS—who realize their family members would just as soon have same-day prescriptions delivered to their house versus going into a CVS store—to own a fifth of the distribution system. I think these are off-the-charts, control-the-system chess matches that are going on.”

The most-publicized partnership—and the one that potentially will have the greatest impact—is the Amazon, JPMorgan and Berkshire Hathaway collaboration. The new independent entity recently named Atul Gawande as its leader and is setting up headquarters in Boston. So why are some of the nation's leading companies moving into uncharted waters?

“I believe they have $3 trillion reasons why they would want to enter this space and why they picked now,” Yarn says. “We absolutely, in my opinion, are at the tipping point of what the public can tolerate. In many companies, health care is the second- or third-largest expense.

“If this venture does only what they have said publicly, their companies and employees will be the big winners. They will scale strategies they have seen work in their company headquarters, carve out their own networks and contract directly.”

Although the company names are new, this concept has been around for decades.

“Harris Rosen in Orlando was the first man I know of to truly do it, and that was over 20 or maybe even 30 years ago,” Yarn says. “What Angela Mitchell has done at Intel has also been incredible. The most effective solutions keep coming from the innovators, as they always do.”

Yarn believes the logical next step is to scale this concept for a mass market.

“Why wouldn't they leverage how great Amazon's brand is in the market into a product that can be delivered to the masses?” he asks. “If and when this happens, it will be a powerful disrupter.” Yarn's message to brokers is simple: Adapt or risk being left behind.

“I want to say to all the agency owners out there that your benefits department is going to look like Blockbuster or Toys “R” Us in the next five to 10 years,” Yarn says.”You absolutely must pivot your agency's direction into charging the client directly for services, all net of commission. Your revenue will have nothing to do with the products you sell and everything to do with the solutions you bring to the client down the supply chain and the money you save them.

“Don't believe me? I'll be glad to fly to your office and show you exactly how shortsighted you might be thinking.”

So is the writing on the wall for the broker profession? Not so fast, Yarn says.

“The threats to the broker community here are tremendous, and they must be taken seriously,” he says. “There is a very real possibility these big boys are already putting themselves farther down the supply chain, because they know single-payer is coming or they know the middle men down the chain will be cut out.

“Think about how many times a group census is touched and emailed before a computer spits out a price. I do not see Amazon or the carriers seeing the efficiency of that system for too much longer, especially if Amazon forces them to compete.”

Now is the time for forward thinking.

“There is one strategy that some in the market are already aware of, and that is redefining your role as a broker into a health care supply-chain consultant,” Yarn says. “You can no longer just sell a plan. You 100 percent must train the employer, all the way down to every employee in the organization, how to use the plan, especially if you have sold a large-dollar deductible product.”

The flip side of this threat is growth opportunities for brokers who are prepared to take advantage. “The opportunity here for a good consultant to earn a living is the greatest it has ever been,” Yarn says. “Virtually every CFO, CEO and HR person knows health insurance is a pain point, and they are willing to have a discussion. There is plenty of opportunity there if you know how to bring value and can sell.

“They are not satisfied with their choices, and if the consultant brings major value and innovative solutions, they can easily win accounts.”

Instant Insights /

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